Don't Mistake The Calm in Bond Markets For Lack of Concern

U.S. Treasuries have traded in a remarkably narrow range for almost five months. Casual observers would likely describe what is going on as a sort of stalemate, with a slowdown in inflation offsetting solid economic growth and tight labor markets. That may be true, but a closer look reveals a lot of fear on the part of bond traders even though volatility is very low.

Yields on benchmark 10-year Treasuries fell to a new low for the year today at 2.08 percent despite a massive funding gap that threatens to blow out the budget deficit, a Federal Reserve that is about to begin shrinking its $4.5 trillion balance sheet next month, and a European Central Bank that is starting to talk about tapering its bond purchases. It’s that second part that has traders on edge, as it will not only signal the end of the post-crisis era of excess monetary accommodation but will come as Congress gears up for its annual debt-ceiling tussle.